Question

Suppose you are going to receive $9,500 per year for five years. The appropriate interest rate is 11 percent.

a. What is the present value of the payments if they are in the form of an ordinary annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

What is the present value of the payments if the payments are an annuity due? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

b. Suppose you plan to invest the payments for five years. What is the future value if the payments are an ordinary annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value            $

What is the future value if the payments are an annuity due? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value            $

c. Which has the higher present value, the ordinary annuity or annuity due?

(Click to select)Ordinary annuity or Annuity due

Which has the higher future value?

(Click to select)Ordinary annuity or Annuity due

Answer 1

This question requires application of TVM concept - annuities' value.

P = $9,500, r = 11%

a) PV of an ordinary annuity (payments at the end of period) is mathematically represented as:

PV = $35,111.02

PV of an annuity due (payments at the beginning of period) is mathematically represented as:

PV = $38,973.23

b) FV of an ordinary annuity (payments at the end of period) is mathematically represented as:

FV = $59,164.11

FV of an annuity due (payments at the beginning of period) is mathematically represented as:

FV = $65,672.17

c) As displayed in calculations above:

Higher present value is for Annuity Due

Higher Future Value is for Annuity Due